Fitch Ratings about Indian economy

Fitch Ratings about Indian economy

Subject: Economy

Context:

• Global rating agency Fitch on Wednesday said India’s external buffers appear sufficient to cushion risks associated with rapid monetary policy tightening in the US and high global commodity prices.

State of Indian Economy 

• External finances are becoming less of a strength in India’s credit profile, but Fitch expects foreign-exchange reserves to remain robust and India’s current-account deficit to be contained at a sustainable level.
• Moreover, public finances remain the key driver of the rating and are only modestly affected by these developments, particularly as India is relatively insulated from global volatility due to the country’s limited reliance on external financing.
• India’s foreign reserves fell by almost $101 billion in January-September 2022, but are still large at around $533 billion.
• The decline has reversed much of the reserve accumulation that occurred during the Covid-19 pandemic, and reflects valuation effects, a widening current-account deficit, and some intervention by the Reserve Bank of India (RBI) to support the Indian rupee’s exchange rate.
• The RBI has attributed about two-thirds of the decline to valuation effects.
• The rupee fell to a record low on Wednesday and has declined more than 11% so far this year.
• Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the “taper tantrum” in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress. 
• Large reserves also provide reassurance about debt repayment capacity. Short-term external debt due is equivalent to only about 24% of total reserves.
• Gross external debt stood at 18.6% of GDP in 2Q22, which is low compared with the median of 72% for ‘BBB’ rated sovereigns in 2021.
• Sovereign exposures are small, with only about 4% of GDP in primarily multilateral financing. 
• Foreign investor holdings of domestic sovereign debt represent under 2% of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure.

Fitch‘s Forecast 

• It forecasts India’s current-account deficit (CAD) in the fiscal year ending March 2023 (FY23) will reach 3.4% of GDP, from 1.2% in FY22. 
• Imports have surged on strong domestic demand growth and high oil and coal prices.
• Meanwhile, export growth has moderated from the fast pace seen in January-June 2022, amid declines in prices for steel, iron ore and agricultural products,” it said.
• Recessions in key European and US export markets will weigh on near-term export prospects. However, it forecasts the CAD to narrow in FY24, to 20% of GDP, as easing global energy prices will also dampen imports. Our robust medium-term economic growth outlook on India should facilitate financing of the deficit, particularly from FDI.

About Fitch:

• Fitch ratings is a credit rating agency that rates the viability of investments relative to the likelihood of default.
• Fitch is one of the top three credit rating agencies internationally, along with Moody’s and Standard & Poor’s.
• Fitch offers sovereign credit ratings that describe each nation’s ability to meet its debt obligations.
• Sovereign credit ratings are available to investors to help give them insight into the level of risk associated with investing in a particular country.
• Countries will invite Fitch and other credit rating agencies to evaluate their economic and political environments and financial situations to determine a representative rating.
• It’s very important to obtain the best sovereign credit rating possible, particularly in the case of developing nations, as it aids in accessing funding in international bond markets.